Avoiding merger pitfalls: Seven tips

Mergers are attempts to pool strengths and eventually drive costs down to improve competitive positioning. Normally envisioned as a way to ensure survival, mergers often lead to demise. Failure rates for mergers and acquisitions run from 50 percent to 80 percent, depending on the author and the criteria used to define "success." Given the huge financial risks involved in M&As, it is important to find ways to improve the odds. One root cause of failed mergers is top leaders focusing too much energy on the mechanical and financial aspects of the consolidation and not enough on the cultural integration.

Top managers who study the impact of a merger visualize the tangible rewards, and the benefits look seductively attractive. They "fall in love" with the concept, overstate the benefits of the proposed merger, and are blind to any downside; just as teenagers who are in love cannot see the limitations of their chosen partner.

The costs, timing, and impact on employees or customers are grossly underestimated and seem to be manageable, so less energy is spent on an organized campaign to mitigate potential negative aspects. Often, the upfront cultural work is neglected, and managers just announce the merger, telling everyone to "work together and get along as new processes are invented." This typically gets the venture off on the wrong foot, and it gets a lot worse before emotional bankruptcy, if not physical bankruptcy, is reached.

Consultants hired to smooth the process focus on the benefits and the quick shot of cash from doing the merger. Their remuneration is tied to an efficient and speedy process, so they spend minimal energy on blending the two cultures until disaster strikes. This pattern is so stubbornly consistent that one wonders why more caution is not exercised by top managers.

Some groups have found ways to do mergers right. Benchmarking organizations with successful merger efforts is a good way to gain insights. Another way is to identify the mistakes made by some of the flops.

A Classic Example

Mergers gone bad are not hard to find. For example, the Daimler-Chrysler merger in 1998 was a classic debacle that cost Daimler nearly $36 Billion over a decade. Just as a reality check, that is a $10-million loss per day for 10 years! The post mortem on this financial disaster points to a failure to merge the cultural aspects of the joined organizations.

Large scale disasters like this are plastered on the front pages of business periodicals. Unfortunately, the more pervasive problem is the thousands of unsung smaller-scale disasters that go on continually within organizations of all sizes and types. These programs involve internal restructuring that rarely get reported in the popular press, but are just as problematical for the people impacted. To avoid disaster, start with a more balanced look at the costs and benefits.

Improve your estimates

Be more conservative during the initial feasibility study. Assume your calculations of the benefits are order-of-magnitude correct, but quadruple the estimated time it will take to accomplish them. Next, take the best estimate of projected investments required to achieve the benefits, and multiply that number by 5-10. Finally, take the best intelligence on how this merger is going to negatively impact customers and suppliers, and bump that up by a factor of five times. That might be a reasonable approximation of a business case for the venture. If the figures based on this more-conservative scenario cause you to gulp, better read up on some of the horror stories of merger disasters in other organizations and check your medicine cabinet for antacids and tranquilizers.

If the merger looks viable, challenge your assumptions. Get a devil's advocate who will call you out if there are signs you are head-over-heels in love with a flawed strategy and blind to reality. Listen to that person and get other non-enamored individuals to enter the conversation. If it still looks right, then going on to the next steps is probably worthwhile.

Seven tips to improve the merger process

1. Spend as much time planning for the cultural integration as you spend on the mechanical aspects of due diligence, valuation of assets, contracts, negotiations, inventory, and other tangible aspects. If you create a team to handle the financial aspects of the transaction, have equally resourced teams to work through the culture integration.

2. Involve impacted individuals in decisions as early in the process as legally possible. Challenge any decision that is not transparent for anything other than legal disclosure reasons. Being open with plans has the impact of drawing the best resources into the concept so they do not bolt out of fear.

3. Double or triple the typical level of communication during the process, and continually stress the vision. The end state needs to be viewed by everyone as worth the hassle to get there. People become engaged and excited about a vision that holds the promise of a better existence for them personally.

4. Model good behavior at the top. Whatever attitude is observed among the top leaders will be replicated and amplified throughout both organizations. If the senior leaders are posturing for an unfairly large share or have an "us versus them" attitude, the general population will mimic that mindset.

5. Do not dump double or triple job functions on individuals and expect them to perform well. You will get minimal compliance followed by burnout.

6. Do not tolerate passive aggressive or other dysfunctional behaviors, but do allow people to vent when needed. Have forums for people to discuss the implications the changes are likely to have on them personally.

7. Celebrate and reinforce small victories on the way to the new vision. Let people know their extra effort in the transition is truly appreciated.

Although these simple rules are common sense, they are not common practice in many merger or acquisition situations. To avoid being a casualty, follow the guidance above and be highly sensitive to the cultural aspects of an integration effort, and you will have more success.

Bob Whipple, MBA, CPLP, is a consultant, trainer, speaker and author in the areas of leadership and trust. He is the author of "The Trust Factor: Advanced Leadership for Professionals," "Understanding E-Body Language: Building Trust Online," and "Leading with Trust is Like Sailing Downwind." For more information, go to www.Leadergrow.com, bwhipple@leadergrow.com or call (585) 392-7763.